Monday, December 1, 2008

Bear-cessions: What happened before when we had a bear market and a recession?

This ugly mess has me pondering the prior results of bear markets and recessions. I view our current scenario as the credit crisis (with all the resounding greed, lack of oversight, and ineptitude) having caused the bear market and amplified the recession. Accordingly, I think the fixing of the credit crisis will fix the bear market and the recession. But, I was curious to see what had happened before?

Since 1926, we’ve had 13 bear markets , which is a decline of 20% or more (including this one). We’ve also had 15 recessions (including this one). Nine times (including this one), the bear markets and the recessions overlapped. Three recessions skipped a bear. Two bears skipped recessions (or straddled between them). What I’m interested in is the nine times they went together.

Here are some of my observations about eight prior bear-cessions:

  1. The average length of the recession part of the bear-cession was 14 months;
  2. The average length of the bear part of the bear-cession was 23 months;
  3. The bear market always preceded the recession, and did so on an average of 7 months;
  4. With two exceptions, the bear market ended before the recession. When the bear ended before the recession, it usually did so about 4 months before the recession ended.
  5. The average decline in the bear part of the bear-cession (on the S&P 500), was -39%;
  6. The average 1-yr return on the S&P 500 after the trough of the bear was +46%;
  7. In 3 of the 4 most recent recessions (excluding this one), the date the recession was declared was either after or near the end of the recession.

So, let’s look at the bear-cession of 2008:

  1. The market peak was 10/09/2007, so as of November ’08, we’re 13 months into the bear market;
  2. This recession hasn’t had a formally declared start date, but it probably started around November 2007 (I’ve seen the date 11/16/2007 bandied about)
  3. If the recession part is leaning to the average, the recession should be ending 4 months after the bear market ends , or about 14 months from the start (April 2009?)
  4. After the trough in the market, the market should recover reasonably. If the trough is 8,000 on the Dow, the recovery would be to about 11,200 by June of 2010.

The Big Nasty: The one bear-cession I’d like to ignore is October 1929 to July of 1932 (recession went to March of 1933). This is the Grizzly of all bears, with an 86% market decline and a 34 month bear market. The recession lasted 42 months. The resulting one-year stock market recovery was 124% (which sounds good, but isn’t, off of an 86% decline. I think the Great Depression was an example of what NOT to do in a bear-cession (like raise interest rates, tighten credit, and pass tariffs, plus generally ignore the malaise). If we toss out the Big Nasty from the prior observations, the average bear market was 20 months, the average recession was 9 months (3 quarters). I think we’ve effectively moved away from Great Depression mistakes, with lower oil prices, lower interest rates and (I can’t believe I’m going to say this) smarter government.

All in all, I believe the bear-cession of 2008-2009 is more than half over. That is, if history repeats itself and we all know it does.

Leon LaBrecque